How Deloitte Failed To See Massive $470 Million Scam By Nigerian Firm

An international arm of auditing firm Deloitte that had certified a Nigerian company Tingo - accused of fraud by Hindenburg Research - as having over $470 million in its bank had only $50, according to the Securities and Exchange Commission, reports said.

The US regulator said it found "billions of dollars" in fictitious transactions through entities controlled by Dozy Mmobuosi, the founder and former CEO of Tingo.

Deloitte had given the fintech a clean, unqualified audit for its 2022 accounts. This discrepancy was discovered when short seller Hindenburg questioned Tingo's accounts, asking whether the firm had "missed or rushed through procedures".

Deloitte's Indian affiliate has also been in controversy in the past five years. Its auditing practices came into the limelight after the collapse of indebted infrastructure financier IL&FS Group.

This led to an investigation by Indian regulators and agencies including the Serious Fraud Investigation Office (SFIO), and the Ministry of Corporate Affairs. Deloitte's audit quality was examined by the National Financial Reporting Authority (NFRA), which found many lapses in its procedure.

Hindenburg had flagged the issues in Tingo's financials "are glaring enough that we'd expect they could have been spotted by any semi-conscious finance undergrad with severe vision loss," Hindenburg wrote. "These issues were apparently not glaring enough for the company's auditor, however."

In the IL&FS matter, during arguments before the National Company Law Tribunal, and the Bombay High Court, the government alleged that Deloitte's Indian audit firm auditing the relevant IL&FS entities connived and colluded with a coterie to conceal information and falsify the books of account. It was alleged that the auditors knowingly did not report the true state of affairs at IL&FS as they failed to report the negative net owned funds and negative capital to risk asset ratio of certain IL&FS group entities.

Petitions filed by Deloitte and some of its partners that challenged the SFIO's investigation report were dismissed by the Supreme Court in May 2023, paving the way for the Mumbai trial court to continue with proceedings arising from the SFIO's criminal complaint.

Reports by the Institute of Chartered Accountants, Reserve Bank of India, and the SFIO also noted that the auditor, along with their engagement team did not perform their duties diligently.

The government alleged that despite having knowledge of the impact of funding of default borrowers for principal and interest payments, Deloitte did not report in the Auditor's Report from FY 2013-14 to 2017-18, leading to non-compliance of Section 143(1)(a) of the Companies Act.

The regulators alleged that Deloitte's firm auditing IL&FS attempted to postpone the provisioning and recognition of non-performing assets (NPA) by transferring the loans by mere book entry resulting in showing old loans as closed and non-provisioning of new loans.

Two audit quality reports by the NFRA had highlighted Deloitte's failure in auditing certain IL&FS entities. To be sure, the NFRA is tasked with recommending accounting and auditing policies and standards to be adopted by companies. It also monitors and enforces compliance with accounting and auditing standards, while overseeing the quality of service of the professions associated with ensuring compliance with such standards.

The audit watchdog concluded that Deloitte's audit firms violated the provisions of Section 144 of the Companies Act, 2013. It noted that the audit firm did not have adequate justification for issuing an audit report.

The NFRA pointed out that failures and violations by the auditor undoubtedly and fatally compromised the independence required from an audit firm. Similarly, practices relating to independence have been shown to be severely inadequate and not fit for purpose, the NFRA said in its report.

As a result of these failures, the NFRA had barred the former Deloitte Haskins and Sells LLP chief Udayan Sen from auditing for seven years, and imposed a penalty for auditing lapses at Infrastructure Leasing & Financial Services Ltd.

The findings by the regulators and the NFRA have been challenged by Deloitte and its partners before various forums.

The Tingo case is not the first recent instance where the international network of firms has faced regulatory issues. In September 2023, the US Public Company Accounting Oversight Board (PCAOB) sanctioned Deloitte & Touche S.A.S. for its quality control violations and imposed a $900,000 fine on the Colombian affiliate of the Deloitte global network.

The PCAOB found that Deloitte & Touche's Colombia's system of quality control failed to provide it with reasonable assurance that audit work would be performed and documented in accordance with PCAOB standards.

Chinese regulators had also imposed a heavy fine of $30.8 million on Deloitte's Beijing office for its failure to adequately audit a Chinese state-owned asset management company whose former head was sentenced to death on corruption charges.

The Chinese regulator noted that Deloitte failed to pay close enough attention to management activities, and that the audit did not meet the requisite standards.

Similarly, the Malaysian audit firm - Deloitte PLT - agreed to pay Malaysia's government $80 million to resolve certain claims related to its auditing of accounts of scandal-linked state fund 1MDB and its unit SRC International from 2011 to 2014. That was when the Malaysian government and regulators investigated the firm's role in auditing the financial statements of 1MDB.

With inputs from agencies